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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
NYMEX HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 333-30332 13-4098266
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR FILE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
ONE NORTH END AVENUE, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 13, 2000, no shares of the registrant's common stock were
outstanding. As described in this report, the registrant and its wholly owned
subsidiary, New York Mercantile Exchange, Inc., will succeed to the business and
operations of the New York Mercantile Exchange upon consummation of a
demutualization of the New York Mercantile Exchange. Upon consummation of the
demutualization, the registrant will have 816 shares of common stock
outstanding, none of which will be listed for trading on any stock exchange or
included in any automated quotation system. The registrant's subsidiary, New
York Mercantile Exchange, Inc., will have 816 class A memberships outstanding,
representing trading privileges, and one class B membership outstanding,
representing all of the economic rights and substantially all of the voting
power in New York Mercantile Exchange, Inc., outstanding upon completion of the
demutualization. Upon consummation of the demutualization transaction, all of
the common stock of the registrant and the class A memberships of New York
Mercantile Exchange, Inc. will be held by the former members of the New York
Mercantile Exchange. The sole class B membership in New York Mercantile
Exchange, Inc. will be held by the registrant.
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TABLE OF CONTENTS
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PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Unaudited Condensed Consolidated Statements of Operations
and Members' Equity for the Three Months and Nine Months
Ended September 30, 2000 and September 30, 1999........... 3
Unaudited Condensed Consolidated Balance Sheets at September
30, 2000 and December 31, 1999............................ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and September
30, 1999.................................................. 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Nine Months Ended September
30, 2000 and September 30, 1999........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures............................................................ 23
</TABLE>
PRELIMINARY STATEMENT: A registration statement on Form S-4 with respect
to the registrant's common stock was declared effective on May 12, 2000. Until
consummation of the demutualization transaction described therein, the
registrant has no material operations or assets. The information contained in
this Form 10-Q is presented with respect to the New York Mercantile Exchange and
its subsidiaries (collectively, the "Exchange"), a New York not-for-profit
corporation. Upon consummation of the demutualization transaction, the
registrant and its subsidiaries will assume all of the assets, liabilities,
rights and obligations of the Exchange.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND MEMBERS' EQUITY
(IN THOUSANDS, EXCEPT PER NYMEX MEMBERSHIP AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Clearing and transaction fees, net of member fee
rebates............................................ $22,647 $29,053 $ 70,487 $ 80,109
Market data fees...................................... 8,848 8,469 25,899 26,068
Other, net of rebates................................. 1,324 666 3,495 2,810
------- ------- -------- --------
Total operating revenues...................... 32,819 38,188 99,881 108,987
------- ------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits........................ 15,249 11,731 38,587 34,236
Professional services................................. 3,444 1,207 14,907 5,115
General and administrative............................ 3,493 3,702 11,779 10,591
Rent and facility..................................... 4,065 3,374 11,561 9,200
Telecommunications, equipment rentals and
maintenance........................................ 4,446 3,581 11,156 11,350
Depreciation and amortization of property and
equipment, net of deferred credit amortization..... 3,682 2,863 10,286 8,576
Marketing............................................. 629 606 1,864 1,778
Amortization of goodwill.............................. 538 538 1,615 1,615
Loss on disposition of property and equipment......... 434 -- 730 --
Other................................................. 1,578 1,739 3,559 3,723
------- ------- -------- --------
Total operating expenses...................... 37,558 29,341 106,044 86,184
------- ------- -------- --------
(LOSS) INCOME FROM OPERATIONS........................... (4,739) 8,847 (6,163) 22,803
OTHER INCOME (EXPENSES):
Investment income, net................................ 2,718 1,617 7,046 3,364
Interest expense...................................... (1,928) (1,926) (5,790) (5,778)
------- ------- -------- --------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES.......................................... (3,949) 8,538 (4,907) 20,389
(BENEFIT) PROVISION FOR INCOME TAXES.................... (2,051) 4,098 (2,574) 9,787
------- ------- -------- --------
NET (LOSS) INCOME....................................... (1,898) 4,440 (2,333) 10,602
MEMBERS' EQUITY, BEGINNING OF PERIOD.................... 91,585 92,225 93,202 86,233
LESS NET TRANSFER TO MEMBERS' RETENTION PROGRAM:
NYMEX Division........................................ (4,070) (330) (4,895) (293)
COMEX Division........................................ (272) (98) (629) (305)
------- ------- -------- --------
MEMBERS' EQUITY, END OF PERIOD.......................... $85,345 $96,237 $ 85,345 $ 96,237
======= ======= ======== ========
(Loss) earnings per NYMEX membership (based on 816 NYMEX
Division memberships)................................. $(2,326) $ 5,441 $ (2,859) $ 12,993
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999(1)
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 30,253 $ 36,592
Marketable securities, at market (cost of $96,978 at
September 30, 2000 and $80,905 at December 31, 1999)...... 98,898 76,992
Clearing and transaction fees receivable.................... 9,005 14,421
Market data fees receivable................................. 5,377 4,647
Deferred income taxes....................................... 1,472 476
Prepaid taxes and other current assets...................... 9,451 8,381
-------- --------
Total current assets.............................. 154,456 141,509
Property and equipment, net................................. 223,468 228,613
Goodwill, net............................................... 19,020 20,635
Other assets................................................ 1,758 1,737
-------- --------
TOTAL ASSETS................................................ $398,702 $392,494
======== ========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................... $ 13,707 $ 12,053
Accrued salaries and related liabilities.................... 6,636 2,848
Deferred credit -- grant for building construction.......... 2,145 2,145
Accrued interest payable.................................... 3,840 1,920
Other current liabilities................................... 4,101 1,874
-------- --------
Total current liabilities......................... 30,429 20,840
Deferred income taxes....................................... 12,568 12,568
Postemployment and postretirement benefits.................. 7,249 6,770
Notes payable............................................... 100,000 100,000
Deferred credit -- grant for building construction.......... 119,571 121,179
Other non-current liabilities............................... 1,200 --
Subordinated commitment -- members' retention program....... 42,340 37,935
-------- --------
Total liabilities................................. 313,357 299,292
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 8)
MEMBERS' EQUITY(2).......................................... 85,345 93,202
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $398,702 $392,494
======== ========
</TABLE>
---------------
(1) The amounts as of December 31, 1999 have been derived from the audited
consolidated financial statements of the New York Mercantile Exchange and
its subsidiaries.
(2) Upon consummation of the demutualization transaction, members' equity will
become "shareholders' equity."
The accompanying notes are an integral part of these statements.
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (2,333) $ 10,602
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment,
net of deferred credit amortization................... 10,286 8,576
Amortization of goodwill................................ 1,615 1,615
Deferred income taxes................................... (996) --
Loss on disposition of property and equipment........... 730 --
Net changes in operating assets and liabilities:
(Increase) decrease in marketable securities:
Corporate funds.................................... (11,612) 3,665
Members' retention funds........................... (10,294) 1,019
Decrease (increase) in clearing and transaction fees
receivable........................................... 5,416 (4,253)
Increase in market data fees receivable.............. (730) (1,075)
(Increase) decrease in prepaid taxes and other
current assets....................................... (1,070) 5,539
Increase in accounts payable and accrued
liabilities.......................................... 1,654 4,834
Increase in accrued salaries and related
liabilities.......................................... 3,788 4,039
Increase in accrued interest payable................. 1,920 1,920
Increase in other current liabilities................ 2,227 1,050
Increase in postemployment and postretirement
benefits............................................. 479 503
Increase in other non-current liabilities............ 1,200 --
-------- --------
Net cash provided by operating activities............ 2,280 38,034
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (7,479) (12,888)
Increase in other assets.................................. (21) (958)
-------- --------
Net cash used in investing activities................ (7,500) (13,846)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions under NYMEX Division members' retention
program................................................. (1,119) (832)
-------- --------
Cash used in financing activities.................... (1,119) (832)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (6,339) 23,356
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 36,592 14,353
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 30,253 $ 37,709
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest................................................ $ 3,846 $ 3,840
======== ========
Income taxes............................................ $ -- $ --
======== ========
Non-cash members' equity transaction -- transfer to
subordinated
commitment -- members' retention program:
NYMEX Division.......................................... $ 4,895 $ 293
======== ========
COMEX Division.......................................... $ 629 $ 305
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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NEW YORK MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- The New York Mercantile Exchange is a membership
corporation organized under the New York State Not-for-Profit Corporation Law.
Under these laws, the Exchange is prohibited from paying dividends (subject to
only very limited exceptions).
As an exchange designated by the Commodity Futures Trading Commission (the
"CFTC") for trading futures contracts and options on futures contracts, the
Exchange has the primary objective of creating and maintaining an orderly market
for contracts that are traded on the Exchange. Through its in-house clearing
unit, the Exchange stands as buyer to every seller and seller to every buyer. To
manage the risk of financial non-performance, the Exchange requires clearing
members to post margin, in the form of cash, U.S. government securities or
irrevocable letters of credit. The Exchange also requires guaranty fund deposits
from clearing members which would be available to cover financial
non-performance, and there is a system of rules providing for assessments of
clearing members in the event of financial non-performance by any one of them.
The Exchange has extensive surveillance and compliance operations and procedures
to monitor and enforce the rules pertaining to trading, position limits and the
financial status of its members.
BASIS OF PRESENTATION -- The accompanying unaudited condensed consolidated
financial statements of the New York Mercantile Exchange and its subsidiaries
(collectively, "NYMEX" or the "Exchange") have been prepared in accordance with
Accounting Principles Board Opinion No. 28 and Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC"). These are
unaudited condensed consolidated financial statements and do not include all
necessary disclosures required for complete financial statements.
In the opinion of the Exchange's management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Exchange's
financial position, results of operations and cash flows for the dates and
interim periods covered. Interim period operating results may not be indicative
of the operating results for a full year. This information should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of December 31, 1999 and 1998 and for each year in the three-year period
ended December 31, 1999.
Accounting principles generally accepted in the United States of America
require that management make estimates and assumptions that affect the amounts
reported in these statements and accompanying notes. These estimates and
assumptions are based on judgment and available information and, consequently,
actual results could be materially different from these estimates.
Certain reclassifications have been made to the prior year amounts to
conform to the current presentation. All intercompany balances and transactions
have been eliminated in consolidation.
For a summary of significant accounting policies (which have not
significantly changed from December 31, 1999 -- see note 2 to the unaudited
condensed consolidated financial statements) and additional information, see
note 1 to the audited December 31, 1999 financial statements, which were filed
with the SEC on the Exchange's Form S-4 Registration Statement, no. 333-30332,
on May 12, 2000.
2. NEW ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, effective for fiscal years beginning after
December 15, 1998. Generally, once the capitalization criteria of this SOP have
been met, external direct costs of materials and services used in development of
internal-use software as well as payroll and payroll-related costs for employees
directly involved in the development of internal-use software
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are to be capitalized. Beginning in 1999, the Exchange capitalized certain
development and implementation costs. The Exchange capitalizes internally
developed software costs based on a project-by-project analysis of each
project's significance to the Exchange and its estimated useful life. The total
amount of internally developed software costs capitalized was $2.1 million and
$5.9 million for the nine months ended September 30, 2000 and 1999,
respectively, and are included in property and equipment, net on the condensed
consolidated balance sheets. All capitalized internally developed software costs
are amortized using the straight-line method over the estimated useful lives,
not exceeding five years. Prior to 1999, all costs associated with internally
developed software were expensed when incurred.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As issued,
SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". SFAS No. 137 deferred the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133". The Exchange is in the
process of evaluating the impact of adopting SFAS No. 133, as amended by SFAS
No. 138.
3. REVENUE REBATE AND FEE REDUCTION PROGRAMS
Effective January 1, 1996, the Exchange adopted a fee rebate program, which
substantially reduces clearing fees for the NYMEX Division members. Rebates
under this program totaled $3.4 and $3.6 million for the three months ended
September 30, 2000 and September 30, 1999, respectively, and $9.9 and $9.8
million for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Clearing and transaction fees are presented in the unaudited
condensed consolidated statements of operations and members' equity net of these
rebates.
The Exchange also adopted several incentive programs for members for the
purpose of reducing various operating costs such as telephone, rent and
marketing expenses. These incentive programs totaled $1.0 million and $900,000
for the three months ended September 30, 2000 and September 30, 1999,
respectively, and $2.0 and $2.1 million for the nine months ended September 30,
2000 and September 30, 1999, respectively. Other revenues are presented in the
unaudited condensed consolidated statements of operations and members' equity
net of fee reductions related to these programs.
4. SEGREGATED FUNDS
The Exchange is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Exchange as margin for house and customer accounts. These assets belong to the
clearing member firms and are not included in the accompanying unaudited
condensed consolidated financial statements. At September 30, 2000 and 1999,
$245,323 and $35,884,991 of cash, $4,233,617,050 and $3,323,682,350 of U.S.
Treasury obligations, and $15,300,000 and $0 of U.S. Treasury obligations
purchased under agreements to resell, respectively, were segregated pursuant to
such regulations by the NYMEX Division of the Exchange. In addition, at
September 30, 2000 and 1999, the NYMEX Division held irrevocable letters of
credit amounting to $154,652,000 and $103,106,000, respectively, which are used
by clearing members to meet their obligations to the Exchange for margin
requirements on both open futures and options positions, as well as delivery
obligations, in lieu of depositing cash and/or securities. The Exchange invests
cash deposits and earns interest thereon. All income earned on deposits of U.S.
government securities accrue to the clearing member firms depositing such
securities.
At September 30, 2000 and 1999, the segregated funds of the Exchange's
Commodity Exchange, Inc. ("COMEX") Division consisted of $77,803 and $3,752,952
in cash, $632,845,000 and $1,246,405,000 in U.S. Treasury obligations, and
$1,120,000 and $6,840,000 of U.S. Treasury obligations purchased under
7
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agreements to resell, respectively. The COMEX Division also held irrevocable
letters of credit aggregating $37,800,000 and $37,950,000 as of September 30,
2000 and 1999, respectively.
5. GUARANTY FUND
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to
$2,000,000, depending upon such clearing member firm's reported regulatory
capital, in a fund known as a "Guaranty Fund" for the respective clearing
Division (NYMEX Division and/or COMEX Division). Separate and distinct Guaranty
funds, held by the Exchange, are maintained for the NYMEX and COMEX Divisions.
These funds may be used by the Exchange for any loss sustained by the Exchange
as a result of the failure of a clearing member firm to discharge its
obligations.
At September 30, 2000 and 1999, the total deposits maintained in the NYMEX
Division Guaranty Fund were $81,156,000 and $84,256,000, respectively. At
September 30, 2000 and 1999, the total deposits for the COMEX Division Guaranty
Fund were $78,975,525 and $74,258,150, respectively.
6. SEGMENT REPORTING
The Exchange has two operating segments: the NYMEX Division, providing
futures and options trading of energy product contracts and platinum group
metals contracts, and the COMEX Division, providing futures and options trading
of precious metals contracts, copper and aluminum contracts, FTSE Eurotop 100(R)
stock index futures and options contracts, and FTSE Eurotop 300(R) stock index
futures contracts. A summary of operating revenues by business segment follows
(in thousands):
<TABLE>
<CAPTION>
NYMEX COMEX TOTAL
----------------- ----------------- ------------------
3 MOS. 9 MOS. 3 MOS. 9 MOS. 3 MOS. 9 MOS.
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Three and Nine Months Ended September
30, 2000
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours(1)......... $20,515 $61,422 $ 3,831 $14,263 $24,346 $ 75,685
NYMEX ACCESS(R)(2)............... 1,566 4,245 121 497 1,687 4,742
Member fee rebates............... (3,386) (9,940) N/A N/A (3,386) (9,940)
Market data fees................... 4,824 14,024 4,024 11,875 8,848 25,899
Other, net of rebates.............. 1,289 3,448 35 47 1,324 3,495
------- ------- ------- ------- ------- --------
Total operating revenues.... $24,808 $73,199 $ 8,011 $26,682 $32,819 $ 99,881
======= ======= ======= ======= ======= ========
Three and Nine Months Ended September
30, 1999
OPERATING REVENUES:
Clearing and transaction fees
Regular trading hours(1)......... $23,628 $64,805 $ 6,520 $18,811 $30,148 $ 83,616
NYMEX ACCESS(R)(2)............... 2,181 5,609 275 700 2,456 6,309
Member fee rebates............... (3,551) (9,816) N/A N/A (3,551) (9,816)
Market data fees................... 4,605 14,129 3,864 11,939 8,469 26,068
Other, net of rebates.............. 686 2,742 (20) 68 666 2,810
------- ------- ------- ------- ------- --------
Total operating revenues.... $27,549 $77,469 $10,639 $31,518 $38,188 $108,987
======= ======= ======= ======= ======= ========
</TABLE>
---------------
(1) Clearing and transaction fees generated from trading on the open outcry
system during regular trading hours.
(2) Clearing and transaction fees generated from trading on NYMEX ACCESS(R) (the
Exchange's electronic trading system).
7. REDUCTION-IN-WORKFORCE
On August 1, 2000, the Exchange implemented a reduction-in-workforce
program resulting in the elimination of 10% of the Exchange's staff. These staff
reductions encompassed various professional and clerical positions throughout
the Exchange. The total cost of this program was $1.8 million, of which
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$1.7 million was for severance payments to affected employees and were made by
September 30, 2000. The remaining $100,000 of the program's cost represents
benefit payments to be made on the affected employees' behalf through the rest
of 2000. This $100,000 is reflected in accrued salaries and related liabilities
on the Balance Sheet as of September 30, 2000.
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Exchange is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of litigation and legal proceedings to which the Exchange is a
party as of September 30, 2000 that could have, if resolved against the
Exchange, a material adverse effect on its business, operating results or
financial condition. While the ultimate result of the proceedings against the
Exchange cannot be predicted with certainty, it is the opinion of management,
after consultation with outside legal counsel, that the resolution of these
matters will not have a material adverse effect on the Exchange's consolidated
financial position, results of operations or cash flows.
The Exchange has been named as a defendant in the following legal actions:
- Ricky Barnes v. New York Mercantile Exchange Inc., Commodity Exchange,
Inc., A.J. Contracting Company, Inc., Turner Construction Company, Inc.
and Zwicker Electric Company, Inc. This action is pending in New York
State Supreme Court (New York County). The Exchange was served with the
summons and complaint on or about March 4, 1998. This is a personal
injury case that relates to the construction of One North End Avenue.
Plaintiff, an employee of Forest Datacom Services, Inc., a subcontractor
of A.J. Contracting, alleges that he was injured on December 17, 1996
while working at the One North End Avenue construction site. Plaintiff
seeks $10,000,000 in compensatory damages. The Exchange and the Commodity
Exchange, Inc. are represented by insurance counsel. The case is
currently in discovery. On October 17, 2000 A.J. Contracting filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code; as a
result, the action against A.J. Contracting Company, Inc. was stayed.
- Electronic Trading Systems Corporation v. New York Mercantile
Exchange. This action was originally filed in the United States District
Court for the Northern District of Texas (Dallas Division), and is
currently pending in United States District Court for the Southern
District of New York. The Exchange was served with a summons and
complaint on or about May 10, 1999. This is a patent infringement case.
Plaintiff alleges that it is the owner of United States Letters Patent
No. 4,903,201 entitled "Automated Futures Trade Exchange" and that
defendants are infringing this patent through use of their respective
electronic trading systems. Plaintiff seeks an unspecified amount of
royalties. The Exchange is providing its own defense to this action. On
September 15, 2000, the Court granted NYMEX's motion to sever and
transfer venue to the Southern District of New York. On October 2, 2000,
the case was transferred to the Southern District of New York. The case
is in discovery.
- Phillip Petruzzi and Joann Petruzzi v. New York Mercantile Exchange, Inc.
and Commodities Exchange Center. This action is pending in New York
State Supreme Court (New York County). The summons and complaint were
filed on or about December 28, 1995. This is a personal injury claim that
relates to plaintiff's trading activity when the Exchange was located at
4 World Trade Center. Plaintiff, an Exchange member, alleges that he was
injured on July 23, 1993 while trading in the Natural Gas Ring. Plaintiff
seeks $10,750,000 in compensatory damages and $10,000,000 in punitive
damages. The punitive damages claim was dismissed by the Court on October
3, 2000. The Exchange is represented by insurance counsel. The case is in
discovery.
- Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10" true names
unknown. This action is pending in New York State Supreme Court (Bronx
County). The Exchange was served with the summons and complaint on or
about April 22, 1999. This is an ethnic discrimination case. Plaintiff
alleges that throughout his employment with the Exchange he was subjected
to a hostile work environment and discrimination regarding his ethnic
origin. Plaintiff seeks an unspecified amount of compensatory and
punitive damages. The Exchange has retained counsel to represent it in
this matter. The case is in discovery.
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- George Scivoletti and Maryanne Scivoletti v. New York Mercantile
Exchange, Inc., Cushman & Wakefield, Inc., Paris Maintenance, Inc., A.J.
Contracting Company, Inc. and Space/Management Programs, Inc. This
action was originally filed in United States District Court for the
Southern District of New York and is currently pending in Supreme Court
of the State of New York, County of New York. The summons and complaint
were filed on or about February 2, 1998. This is a personal injury case
that related to plaintiff's trading activity at the Exchange's One North
End Avenue trading facility. Plaintiff alleges that on July 10, 1997 he
was injured while trading in the Unleaded Gasoline Ring. Plaintiffs seek
a total of $30,000,000 in compensatory damages against defendants. The
Exchange is represented by insurance counsel. This action was
discontinued without prejudice pursuant to a stipulation of
discontinuance on September 2, 1999. The parties have agreed to the
refiling of this action in the New York State Court. On June 22, 2000, a
complaint was filed in the Supreme Court of the State of New York, County
of New York. The Exchange answered the complaint on July 11, 2000 and
filed its amended answer on September 7, 2000. On October 17, 2000 A.J.
Contracting filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code; as a result, the action against A.J. Contracting
Company, Inc. was stayed.
- Robert Teofrio and Susan Teofrio v. New York Mercantile Exchange, Turner
Construction Company, A.J. Construction of New York Inc. and A.J.
Contracting Company, Inc. This action is pending in New York State
Supreme Court (New York County). The Exchange was served with the summons
and complaint on or about July 20, 1998. This is a personal injury case
that relates to plaintiff's involvement in the construction of the One
North End Avenue facility. Plaintiff is an ironworker employed by Diamond
Installations, a subcontractor of Turner Construction. Plaintiff alleges
that he was injured on September 11, 1996, while working at the One North
End construction site. Plaintiff seeks a total of $11,000,000 in
compensatory damages. The Exchange is represented by insurance counsel.
This case is in discovery. On October 17, 2000, A.J. Contracting filed
for bankruptcy protection under Chapter 11 of the Bankruptcy Code; as a
result, the action against A.J. Contracting Company, Inc. was stayed.
- Western Capital Design, LLC On Its Own Behalf and on behalf of those
similarly situated v. New York Mercantile Exchange and John Does "1-50",
inclusive. This action was originally filed in State Court in Florida
and is currently pending in United States District Court for the Southern
District of New York. The Exchange was served with the summons and
complaint on or about February 17, 1999. This action relates to alleged
wrongful conduct by the Exchange and Exchange members regarding the
execution of heating oil and natural gas options. Plaintiff alleges that
the prices it was charged for heating oil and natural gas options were
improper and that these improper transactions affected the market price
at which plaintiff transacted its trading. Plaintiff seeks unspecified
compensatory damages and $75,000,000 in punitive damages. The Exchange
has retained counsel to represent it in this matter. This action was
removed from State Court to Federal Court in Florida by notice of removal
filed March 8, 1999. Venue was then transferred to the Southern District
of New York by an order dated May 11, 1999. The Exchange's motion to
dismiss was filed on November 12, 1999 and granted on March 31, 2000. The
Exchange was served with an amended complaint on or about April 26, 2000.
The Exchange's motion to dismiss the amended complaint was argued on
October 3, 2000.
- John Donnellan v. New York Mercantile Exchange, Turner Construction
Company, LaStrada General Construction Corp. and the Faraday Company,
Ltd. This action is pending in New York State Supreme Court (New York
County). The complaint was filed on February 25, 1999. This is a personal
injury case that relates to the construction of the One North End Avenue
facility. Plaintiff alleges that he was injured on February 28, 1996
while working at the One North End Avenue construction site. LaStrada
General Construction Corp. is a subcontractor of Turner. Although the
complaint alleges that the Faraday Company, Ltd. is a subcontractor of
LaStrada, the Exchange has no record of Faraday's relationship to
LaStrada. Plaintiff seeks $25,000,000 in compensatory damages. The
Exchange served its answer to the complaint on June 5, 2000. The case is
in discovery.
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<PAGE> 11
9. SUBSEQUENT EVENTS
On October 4, 2000, the Board of Directors voted to terminate the NYMEX
Division Members' Retention and Retirement Plan. Termination of the Plan
provides for payment of discounted benefits to participants to the extent of
assets placed in trust for the Plan. The value of the Plan's assets and the
related liability, as of September 30, 2000, was $33.5 million; the Exchange
made a contribution, which was approved by the Board of Directors for September
2000, of $3.6 million to the Plan on October 5, 2000. This amount has been
accrued and included in the subordinated commitment on the balance sheet as of
September 30, 2000.
On October 23, 2000, the Exchange received a favorable private letter
ruling from the Internal Revenue Service notifying the Exchange that there would
be no tax consequences to the Exchange or any of its members as a result of the
demutualization transaction. Receipt of the ruling was the last significant
condition required to complete the demutualization of the Exchange.
On November 2, 2000, the Board of Directors of the Exchange voted to
implement the demutualization transaction effective November 15, 2000 or as soon
as practicable thereafter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER NYMEX DIVISION MEMBERSHIP AND
STATISTICAL DATA)
INTRODUCTION
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Exchange during the three and nine
months ended September 30, 2000. This discussion is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements, accompanying notes and tables
included in this quarterly report.
OVERVIEW
Founded in 1872, the Exchange, based in New York City, is the largest
commodity exchange for trading energy futures and options contracts, including
contracts for crude oil, natural gas, heating oil, unleaded gasoline, propane
and electricity, based upon data reported by the Futures Industry Association.
The Exchange is also the second largest commodity exchange for trading platinum
group metals contracts, including futures contracts for platinum and palladium
and options contracts for platinum. Through the Exchange's COMEX subsidiary, the
Exchange is the largest commodity exchange for trading precious metals futures
and options contracts, including contracts for gold and silver, based upon data
reported by the Futures Industry Association. COMEX also provides for trading
copper and aluminum futures and options contracts, FTSE Eurotop 100(R) stock
index futures and options and FTSE Eurotop 300(R) stock index futures. The FTSE
Eurotop(R) contracts are based on an index designed to measure the collective
performance of a sector of the European equities market.
DEMUTUALIZATION
On May 12, 2000, the Exchange's Form S-4 Registration Statement, with
respect to its plan to demutualize, was declared effective by the SEC. The
demutualization transaction will entail a two-step merger process: first merging
NYMEX into a newly formed Delaware non-stock corporation, New York Mercantile
Exchange, Inc. ("NYMEX Exchange"), and, second, NYMEX Exchange will merge with a
subsidiary (NYMEX Merger Sub, Inc.,) of a newly formed, stock holding company
also organized under Delaware law named NYMEX Holdings, Inc. ("NYMEX Holdings").
NYMEX Exchange will survive this merger and become a wholly owned subsidiary of
NYMEX Holdings. As a result, NYMEX Holdings will own all of the equity of NYMEX
Exchange and current NYMEX Division members will receive all of the stock of
NYMEX Holdings, while retaining their trading privileges in NYMEX Exchange. In
the first merger, each NYMEX member will receive one Class A membership and one
Class B membership in NYMEX Exchange for each NYMEX Division membership that the
member owns. The Class A membership represents the trading privileges associated
with a NYMEX Division membership. The Class B membership represents an economic
interest in NYMEX Exchange -- a right to dividends and liquidation of proceeds.
In the second merger, each member's Class B membership will be exchanged for one
share of common stock in NYMEX Holdings. NYMEX Holdings' interest in its
subsidiary will be converted into the sole outstanding Class B membership in
NYMEX Exchange.
On June 20, 2000, the NYMEX Division members voted and approved the
Exchange's demutualization plan.
On July 26, 2000, the Exchange received approval from the CFTC to transfer
its "contract market" designations from the Exchange to NYMEX Exchange upon
consummation of the demutualization transaction.
On October 23, 2000, the Exchange received a favorable private letter
ruling from the Internal Revenue Service notifying the Exchange that there would
be no tax consequences to it or any of its members as a result of the
demutualization transaction. Receipt of the ruling was the last significant
condition required to complete the demutualization of the Exchange.
On November 2, 2000, the Board of Directors of the Exchange voted to
implement the demutualization transaction effective November 15, 2000 or as soon
as practicable thereafter.
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<PAGE> 13
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
The Exchange reported a net loss of $1,898, which was a loss of $2,326 per
NYMEX Division membership, a decline of $6,338 compared to the third quarter of
1999. This decline was primarily the result of the following factors:
- payroll costs associated with the special compensation awarded to the
heirs of the Exchange's late president, and the Exchange's implementation
of the reduction-in-workforce plan,
- a decrease in volume and realized rates on cleared contracts on the NYMEX
Division,
- a substantial decline in trading volume on the COMEX Division,
- costs associated with professional services rendered in connection with
the new NYMEX ACCESS(R) system, as well as the development of an
e-commerce business.
The following discussion provides additional information about the
components of the Exchange's operating results for the third quarter of 2000:
Revenues
Total operating revenues were $32,819 in the third quarter of 2000, down
$5,369, or 14%, from the same period in 1999.
Clearing and transaction fees represent the core business of the Exchange
and are directly affected by volume. Changes in volume are affected by various
external factors such as:
- shifts in supply and demand of the underlying commodities,
- market perception of price volatility in the commodities and financial
markets,
- weather conditions affecting certain energy commodities,
- national and international economic and political conditions.
In the third quarter of 2000, clearing and transaction fees, net of member
fee rebates, were $22,647 compared to $29,053 earned during the same quarter
last year. This 22% decrease was the result of the following two conditions: (1)
a lower average realized rate per contract on the NYMEX Division and (2) a
substantial decline in trading volume on the COMEX Division. Member fee rebates,
which apply only to NYMEX Division members, amounted to $3,386 and $3,551 for
the three months ended September 30, 2000 and 1999, respectively.
The NYMEX Division's clearing and transaction fees, net of member fee
rebates, were $18,695 in the third quarter of 2000, down 16% from the 1999
comparable period. The overall trading volume for the NYMEX Division experienced
a moderate decrease, with a higher proportion of trades billed at the lower
member rate during the third quarter of 2000 when compared with the same period
a year ago.
- Natural gas commodity trading volume fell 20% compared with the third
quarter of 1999 due to lower consumption of natural gas by electric
utilities.
- Crude oil and unleaded gasoline commodity trading volume decreased by 6%
and 13%, respectively, during the third quarter of 2000 when compared
with the same quarter a year ago. While pricing conditions favored
hedging purchases further out into the future, it was not sufficient to
compensate for the relatively high prices which discouraged buyers from
hedging. By contrast, during the third quarter of 1999, pricing
conditions favored the hedging of sales that were further out in time,
and prices were at relatively low prices. These differing price
conditions resulted in a decrease in trading volume for these commodities
during the third quarter of 2000.
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<PAGE> 14
- Heating oil commodity trading volume increased by 32% during the third
quarter of 2000 when compared with the same quarter a year ago. U.S.
inventories were substantially lower during the third quarter of 2000
compared with the same quarter a year ago, thus increasing suppliers'
need to hedge against price changes. This was a leading cause for the
significant increase in trading volume during the third quarter of 2000
for this commodity.
An increase in the ratio of member trades versus non-member trades during
the third quarter of 2000 resulted in a lower average realized rate per contract
due to the fact that member trades are billed at lower rates.
The COMEX Division's clearing and transaction fees were $3,952 in the third
quarter of 2000, down 42% from the 1999 comparable period. Trading volume
significantly decreased in all of the COMEX Division's major contracts: futures
and options on futures in gold, silver and copper. Price stagnation persisted in
silver. Low prices in copper caused a decline in hedging by producers. The gold
market continues to be under pressure from gold sales by the European central
banks which have caused lower prices. This resulted in a decrease in hedging by
producers and a reduction in investor demand.
Market data fees, which represent 27% of the Exchange's total operating
revenues for the third quarter of 2000, increased by 4.5% in the third quarter
of 2000 as compared with the same quarter a year ago. This increase is
reflective of more market data subscribers during the third quarter of 2000 when
compared with the same period a year ago.
Operating Expenses
Total operating expenses were $37,558 during the third quarter of 2000, up
28% from the comparable period in 1999. This $8,217 increase from the same
period in 1999 reflected the Exchange's significant expenditures for corporate
e-commerce initiatives, professional services associated with demutualization,
severance payments and benefits related to staff downsizing, and a special
compensation award to the heirs of the Exchange's late president.
Salaries and employee benefits, which constitute 41% of total operating
expenses for the third quarter of 2000, rose 30% from the similar period a year
ago. This increase is the result of the following:
- the $1.8 million special compensation award to the heirs of the
Exchange's late president, to be paid out over a three-year period,
- a reduction-in-workforce program resulting in the elimination of 10% of
the Exchange's staff. Severance agreements were issued to all employees
affected based on length of service. The cost of this program totaled
$1.8 million.
Professional services increased by $2,237, or 185%, during the third
quarter of 2000, over the same quarter a year ago. Consulting services related
to the post-implementation phase of the new NYMEX ACCESS(R) system constitutes
nearly one-half of this increase. Services rendered on the Exchange's e-commerce
initiatives, totaling approximately $1.0 million, substantially contributed to
the increase during the third quarter as well. Professional services are
expected to continue to increase during the fourth quarter of 2000, as the
Exchange concentrates its efforts on e-commerce business development.
Rent and facility expenses increased by $691, or 20% during the third
quarter of 2000 compared to the same period in 1999. Higher utility costs due to
the significant rise in energy prices make up the majority of this increase.
This trend is expected to continue during the fourth quarter of 2000, as energy
prices remain substantially higher than last year's prices.
Telecommunications, equipment rentals and maintenance increased by $865, or
24%, during the third quarter of 2000 compared to the same quarter last year.
This increase is directly attributable to the Exchange's increased support for
the NYMEX ACCESS(R) system, its electronic trading platform.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $819, or 29%, in the third quarter of 2000
when compared to the same quarter in 1999. This increase, which
14
<PAGE> 15
is expected to continue throughout the remainder of the year 2000, is the result
of amortization expense on internally developed software costs. These costs were
incurred on software development projects that were placed into service during
the fourth quarter of 1999 and, as a result, there was no amortization expense
on these projects prior to the last quarter of 1999.
Other Income
Investment income, net of investment advisory fees, increased by $1,101, or
68%, during the third quarter of 2000 when compared to the same quarter in 1999.
The Exchange primarily held investments in municipal bonds during the third
quarter of 2000. Interest income accounted for $537, or 49%, of the increase,
due to higher interest rates earned during the third quarter of 2000 on the
Exchange's municipal bond investments. The change in net realized gains on the
Exchange's fixed income portfolio contributed $550, or 50%, of the increase. The
increased demand for municipal bonds during this period caused yields to fall
and market values to increase.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
RESULTS OF OPERATIONS
The Exchange reported a net loss of $2,333, which was a loss of $2,859 per
NYMEX Division membership, a decline of $12,935 compared to the similar period a
year ago. This decline was primarily the result of the following:
- costs associated with professional services rendered in connection with
the demutualization plan, the new NYMEX ACCESS(R) system, and the
development of an e-commerce business,
- decrease in the realized rates on cleared contracts on the NYMEX
Division,
- a substantial decline in trading volume on the COMEX Division,
- payroll costs associated with the special compensation awarded to the
heirs of the Exchange's late president, and the Exchange's implementation
of the reduction-in-workforce program.
The following discussion provides additional information about the
components of the Exchange's operating results during the nine months ended
September 30, 2000:
Revenues
Total operating revenues were $99,881 for the nine months ended September
30, 2000, down $9,106, or 8%, from the same period in 1999.
For the nine months ended September 30, 2000, clearing and transaction fees
net of member fee rebates were $70,487 compared to $80,109 in the same period
last year. This 12% decrease was the result of the following two conditions: a
lower average rate realized per contract cleared on the NYMEX Division and a
substantial decline in trading volume on the COMEX Division. Member fee rebates,
which apply only to NYMEX Division members, amounted to $9,940 and $9,816 for
the nine months ended September 30, 2000 and 1999, respectively
The NYMEX Division's clearing and transaction fees, net of member fee
rebates, were $55,727 in the first nine months of 2000, down 8% from the 1999
comparable period. While the NYMEX Division's overall trading volume was
virtually unchanged, decreasing by 0.5%, more trades were billed at the lower
member rate. Volatility existed in several contracts.
- Unleaded gasoline trading volume increased by 8% when compared to the
same period a year ago. The price of the underlying unleaded gasoline
commodity increased, which led to higher options on futures contracts
trading during this period, particularly in the spring of 2000, when
compared with the same period a year ago. Price instability, primarily
during the first six months of 2000, led to this volume increase.
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<PAGE> 16
- Heating oil trading volume increased by 7% during the nine months ended
September 30, 2000 when compared with the same nine month period a year
ago. U.S. inventories were substantially lower, particularly during the
third quarter of 2000 when compared with the same period a year ago, thus
increasing buyers' and sellers' need to hedge against price changes. This
was a leading cause for the significant increase in trading volume during
the nine months ended September 30, 2000 for this commodity.
The COMEX Division's clearing and transaction fees were $14,760 in the
first nine months of 2000, a decrease of 24% from the comparable 1999 period.
Trading volume significantly decreased in all three of COMEX's major futures and
options on futures contracts in gold, silver, and copper. Price stagnation
persisted in silver. Low prices in copper caused a decline in hedging by
producers. The gold market continues to be under pressure from gold sales by the
European central banks, which have caused lower prices. This resulted in a
decrease in hedging by producers and a reduction in investor demand.
Market data fees, which represent 26% of the Exchange's total operating
revenues for the first nine months of 2000, remained virtually unchanged as
compared with the same period a year ago.
Operating Expenses
Total operating expenses were $106,044 during the first nine months of
2000, up 23% from the comparable period in 1999. A significant portion of the
$19,860 increase from the year-ago period reflected the Exchange's considerable
expenditures for e-commerce initiatives, costs associated with the
demutualization transaction, special compensation awarded to the heirs of the
Exchange's late president, and the implementation of the reduction-in-workforce
plan.
Salaries and employee benefits, which constitute 36% of year-to-date 2000
operating expenses, rose 13% from the similar period a year ago. This increase
is the result of the following:
- a $1.8 million special compensation award to the heirs of the Exchange's
late president, to be paid out over a three-year period,
- a reduction-in-workforce program resulting in the elimination of 10% of
the Exchange's staff. Severance agreements were issued to all employees
affected based on length of service. The cost of this program totaled
$1.8 million.
Professional services increased by $9,792, or 191%, during the nine months
ended September 30, 2000, compared with the similar period a year ago.
Consulting services related to the post-implementation phase of the new NYMEX
ACCESS(R) system as well as financial advisory expenses and legal costs relating
to the Exchange's demutualization plan constitute the majority of this increase.
Professional services in connection with the Exchange's e-commerce initiatives
substantially contributed to this increase during the first nine months of 2000
as well.
General and administrative expenses rose $1,188, an 11% increase from the
year-ago period. The primary reasons for the increase included printing,
delivery, and SEC filing fees related to the work on the demutualization plan.
Rent and facility expenses increased by $2,361, or 26%, during the first
nine months of 2000 compared to the same period ended in 1999. A significant
increase in real estate taxes due to expiring abatements was the primary reason
for this increase. Light, heat, and power costs also rose, increasing by 45%
during the first nine months of 2000 due to the rising rates charged for
electricity. This trend is expected to continue during the fourth quarter of
2000, as energy prices remain substantially higher than that of last year.
Depreciation and amortization of property and equipment, net of deferred
credit amortization increased by $1,710, or 20%, in the first nine months of
2000 when compared to the same period during 1999. This increase, which is
expected to continue throughout the 2000 year, is the result of amortization
expense on internally developed software costs. These costs were incurred on
software development projects that were placed into service during the fourth
quarter of 1999 and, therefore, there was no amortization expense on these
projects prior to the last quarter of 1999.
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Other Income
Investment income, net of advisory fees, increased by $3,682, or 109%,
during the nine months of 2000 when compared to the same period in 1999.
Unrealized gains on its fixed income portfolio represented the largest portion
of the increase. The Exchange primarily held investments in municipal bonds
during the third quarter of 2000. The high demand for municipal bonds during
this period caused yields to fall and market values to increase. Interest income
from the Exchange's municipal bond portfolio accounted for $1.2 million, or 33%,
of the increase.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Exchange has made, and expects to continue to make, significant
investments in technology to fund its future growth and increase membership
value. A total of $1,699 was invested in capital expenditures during the third
quarter of 2000 as the Exchange continued to update and enhance its computer
software applications. The Exchange had $129,151 in cash, cash equivalents and
marketable securities at September 30, 2000.
Cash Flow
<TABLE>
<CAPTION>
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
------- -------
<S> <C> <C>
Net cash provided by (used in):
Operating activities...................................... $ 2,280 $38,034
Investing activities...................................... (7,500) (13,846)
Financing activities...................................... (1,119) (832)
------- -------
Net (decrease) increase in cash and cash equivalents........ $(6,339) $23,356
======= =======
</TABLE>
Working Capital
<TABLE>
<CAPTION>
(IN THOUSANDS)
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Current assets......................................... $154,456 $141,509
Current liabilities.................................... 30,429 20,840
-------- --------
Working capital...................................... $124,027 $120,669
======== ========
Current ratio.......................................... 5.08:1 6.79:1
</TABLE>
Current assets at September 30, 2000 increased by $12,947, or 9%, from
year-end 1999 primarily as a result of cash flows from net income before
depreciation and amortization offset by payments for capital expenditures. The
primary changes in current assets consisted of an increase of $21,906 in
marketable securities, offset by declines of $5,416 in clearing and transaction
fees receivable, and $6,339 in cash and cash equivalents. The decline in
receivables was attributable to collection of higher year-end balances. The
decrease in cash and cash equivalents was due to maturing year-end repurchase
agreements. These proceeds were reinvested in marketable securities.
Current liabilities at September 30, 2000 increased by $9,589, or 46% from
year-end 1999, with increases of $3,788 in accrued salaries and related
liabilities and $2,227 in other current liabilities. The increase in accrued
salaries and related liabilities consists primarily of the accrual for
anticipated year-end employee bonuses. The increase in other current liabilities
was primarily attributable to liabilities for unearned revenue from trading
floor fees such as booth license fees and clerk fees.
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Future Cash Requirements
As of September 30, 2000, the Exchange had long-term debt of $100,000. This
debt consisted of the following:
- $31,000 of 7.48% notes with an eleven-year principal payout beginning in
2001,
- $54,000 of 7.75% notes with an eleven-year principal payout beginning in
2011, and
- $15,000 of 7.84% notes with a five-year principal payout beginning in
2022.
The Exchange would incur a redemption premium should it choose to pay off
any series issue prior to its maturity. These notes contain certain limitations
on the Exchange's ability to incur additional indebtedness.
On October 4, 2000, the Exchange's Board of Directors voted to terminate
the NYMEX Division's Members' Retention and Retirement Plan. Assets of $33.5
million are anticipated to be distributed to Plan participants in January 2001.
Such assets are included in current assets in the unaudited condensed
consolidated balance sheet as of September 30, 2000.
enymex(sm), the Exchange's e-commerce initiative, is currently in the
detailed design phase of development. A leading consulting firm has been
retained as system integrator and will be responsible for ensuring that the
complex systems, including trade matching software, are integrated into NYMEX's
back-office systems, including its state-of-the-art clearing system, Clearing
21(R). It is anticipated that enymex(sm) will be introduced during the second
quarter of 2001. Given the technical complexity of the system, it is anticipated
that there will be significant capital and operating expenditures associated
with the development and launch of enymex(sm).
NYMEX believes that its cash flows from operations will be sufficient to
meet its needs for the foreseeable future. In addition, following its
demutualization, NYMEX will have the ability, and may seek, to raise capital
through issuances of stock in the private and public capital markets.
RECENT DEVELOPMENTS
On July 20, 2000, the President of both NYMEX Holdings and the Exchange, R.
Patrick Thompson, passed away. Mr. Thompson, who was associated with the
Exchange as either a member or an executive for 20 years and was appointed
President in October 1989. Previously, Mr. Thompson served as Executive Vice
President, Senior Vice President of Compliance, and General Counsel of the
Exchange.
During his tenure as President of the Exchange, Mr. Thompson made his most
valuable contributions, helping to transform the Exchange into a recognized
global leader in developing confidence in the commodity markets. Mr. Thompson
was instrumental in the successful launch of the natural gas futures contract in
1990, one of the largest energy contracts presently traded. He was also
instrumental in the acquisition of COMEX in 1994. The Exchange experienced a
110% growth in revenues during his presidency and had become the sixth largest
futures exchange in the world by the time of his death.
Mr. Neal Wolkoff, Executive Vice President of the Exchange, has assumed the
duties and responsibilities of the President of the Exchange until a successor
has been duly elected and qualified. Mr. Wolkoff has been associated with the
Exchange since 1981.
On September 22, 2000, the Exchange executed a letter of intent with
Kiodex, Inc., an application service provider of risk management solutions for
the commodity and derivatives markets, to use its trade engine platform as the
order-matching system for enymex(sm). This platform is an automated, scalable,
fault-tolerant order-matching system that will enable customers to enter orders
for derivative commodity products and receive executions and confirmations.
enymex(sm), a business endeavor approved by the Exchange's Board of Directors in
May 2000 and expected to be operational in the second quarter of 2001.
enymex(sm) is expected to become the premier, global exchange for trading and
clearing a wide range of standardized physical commodity contracts, with an
initial focus in the energy markets.
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<PAGE> 19
The Exchange plans to integrate enymex(sm) with its proven clearing
infrastructure to provide counter-party risk management and net margining of
positions across derivatives markets, and to combine the interface of an
electronic derivatives market with routing to the Exchange's established futures
and options market.
NYMEX is currently in discussions with several potential alliance partners
to provide third party network connectivity to enymex(sm), content and pricing
information for the enymex(sm) web site, and clearing services to external
organizations. It is anticipated that agreements with these potential alliance
partners will be finalized in the near term. On November 2, 2000, a letter of
intent was signed with Platts, a division of the McGraw-Hill Companies, Inc., to
enable NYMEX to license certain Platts energy and metals pricing data for use
with energy products.
On October 4, 2000 the Exchange's Board of Directors voted to terminate the
NYMEX Division's Members' Retention and Retirement Plan. The assets of this Plan
are held in a trust and will be distributed in January 2001. The value of the
assets and related liability, as of September 30, 2000, was $33.5 million; the
Exchange made a contribution of $3.6 million on October 5, 2000. This amount has
been accrued and included in the subordinated commitment on the balance sheet as
of September 30, 2000.
On October 23, 2000, the Exchange received a favorable private letter
ruling from the Internal Revenue Service notifying the Exchange that there would
be no tax consequence to the Exchange, or any of its members as a result of the
demutualization transaction.
On November 2, 2000, the Board of Directors of the Exchange voted to
implement the demutualization transaction effective November 15, 2000 or as soon
as practicable thereafter.
FORWARD LOOKING AND CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. Except for the historical information and
discussions contained herein, statements contained in this Form 10-Q may
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Exchange has tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"believes," "expects" and words and terms of similar substance in connection
with any discussion of future operating or financial performance. These
statements involve a number of risks, uncertainties and other factors that may
cause actual results to differ materially, including; the Exchange's ability to
continue to develop and market new innovative products and services and to keep
pace with technological change; failure to continue to develop and market a new
electronic trading system; failure to obtain or protect intellectual property
rights; competitive pressures; financial condition or results of operations;
quarterly fluctuations in revenues and volatility of commodity prices; changes
in financial or business conditions; ability to attract and retain key
personnel; ability to successfully manage acquisitions and alliances; and legal
and economic changes and other risks, uncertainties and factors discussed
elsewhere in this Form 10-Q, in the Exchange's other filings with the SEC, or in
materials incorporated therein by reference.
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the unaudited condensed consolidated financial statements and related notes, and
the other financial information contained in this quarterly report. Such
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and are considered by
management to present fairly the Exchange's financial position, results of
operations and cash flows. These unaudited condensed consolidated financial
statements include some amounts that are based on management's best estimates
and judgements, giving due consideration to materiality.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Exchange's marketable
securities, excluding equity securities, including expected principal cash flows
for the years 2000 through 2005 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
TOTAL FAIR MARKET
2005 PRINCIPAL VALUE AS OF
AND CASH SEPTEMBER 30,
2000 2001 2002 2003 2004 THEREAFTER FLOWS 2000
-------- -------- -------- -------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Bonds, Federal Agency
Issues.......................... $ -- $ -- $ -- $ -- $ 992 $ 19,166 $ 20,158 $20,447
Weighted average interest rate.... -- -- -- -- 6.50% 6.93%
U.S. Treasury issues.............. -- 10,200 -- -- 1,932 -- 12,132 12,198
Weighted average interest rate.... -- 5.88% -- -- 5.88% --
Municipal Bonds................... 479 3,122 2,773 2,488 7,561 37,225 53,648 55,223
Weighted average interest rate.... 3.46% 6.21% 6.28% 4.95% 6.20% 5.03%
---- ------- ------ ------ ------- --------- -------- -------
Total Portfolio, excluding equity
securities...................... $479 $13,322 $2,773 $2,488 $10,485 $ 56,391 $ 85,938 $87,868
==== ======= ====== ====== ======= ========= ======== =======
</TABLE>
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
TOTAL FAIR MARKET
2005 PRINCIPAL VALUE AS OF
AND CASH DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER FLOWS 1999
-------- -------- -------- -------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Bonds, Federal Agency
Issues........................... $ 2,157 $ -- $2,351 $ -- $ 992 $ -- $ 5,500 $ 5,518
Weighted average interest rate..... 2.50% -- 5.50% -- 6.50% --
U.S. Treasury issues............... 10,199 -- -- -- 3,948 974 15,121 15,092
Weighted average interest rate..... 4.45% -- -- -- 5.88% 6.00%
Municipal Bonds.................... 2,959 95 3,946 898 7,352 43,012 58,262 54,319
Weighted average interest rate..... 4.37% 3.57% 5.53% 4.50% 5.88% 4.80%
------- ----- ------ ---- ------- --------- ------- -------
Total Portfolio, excluding equity
securities....................... $15,315 $ 95 $6,297 $898 $12,292 $ 43,986 $78,883 $74,929
======= ===== ====== ==== ======= ========= ======= =======
</TABLE>
INTEREST RATE RISK
Current Assets. In the normal course of business, the Exchange invests
primarily in fixed income securities. Marketable securities bought by the
Exchange are typically held for the purpose of selling them in the near term and
are classified as trading securities. Unrealized gains and losses are included
in earnings. For the nine months ended September 30, 2000 and the year ended
December 31, 1999, the Exchange had net investment income of $7.0 million and
$3.9 million, respectively. Accordingly, a substantial portion of the Exchange's
income depends upon its ability to continue to invest monies in these
instruments at prevailing interest rates and market prices. The fair value of
these securities at September 30, 2000 and December 31, 1999 was $99 million and
$77 million. The change in fair value, using a hypothetical 10% decline in
prices, is estimated to be a $9.9 million and $7.7 million loss for September
30, 2000 and December 31, 1999, respectively. The Exchange also invests in U.S.
government securities and repurchase agreements and maintains interest-bearing
balances in its trading accounts with its investment managers. Financial
instruments with maturities of three months or less when purchased are
classified as cash equivalents in the consolidated financial statements.
Debt. The interest rate on the Exchange's long-term indebtedness is a
weighted average fixed rate of 7.68%. The Exchange's fixed rate debt is exposed
to the risk that the fair market value of its debt will increase in a declining
interest rate environment. This would result in the Exchange paying a redemption
premium if it
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<PAGE> 21
should choose to refinance this debt. Management has not deemed it necessary to
employ any market or interest risk management strategies, such as interest rate
swap agreements. In the future, as the Exchange pursues its market strategy, it
may become subject to a higher degree of interest rate sensitivity if it is
required to borrow at higher or at variable rates. This could significantly
increase the Exchange's future sensitivity to interest rate fluctuations and
materially affect, in a negative manner, the Exchange's future financial
position and results of operations. There have been no material changes in the
Exchange's outstanding debt since December 31, 1999.
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<PAGE> 22
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 1, 2000, NYMEX Holdings, Inc., filed a Form 8-K with the SEC. The
reportable event was the death of R. Patrick Thompson, President of NYMEX
Holdings, Inc. on July 20, 2000. The 8-K further disclosed that Neal L. Wolkoff,
Executive Vice President of NYMEX Holdings, Inc., assumed the duties and
responsibilities of the President of NYMEX Holdings, Inc., until a successor is
duly elected and qualified.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on the 13th day of November, 2000.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
23
